As India prepares for the Union Budget 2026, investment banker Morgan Stanley expects the government to consolidate the fiscal position in the budget and forecast a fiscal deficit target of 4.2 per cent for FY27.
The banker says that the budget will focus on target spending to boost consumption and job creation, while continuing structural reform.
Here are the key budget expectations by Morgan Stanley on India’s fiscal target, GDP growth, consumer spending and inflation for FY27.
Fiscal deficit target
Morgan Stanley says that for FY27, the government is likely to gradually reduce the fiscal deficit with a target of 4.2% of GDP, compared to a target of 4.4% of GDP in FY26. The gradual pace of fiscal consolidation by the government is in line with the central government debt reduction to 55.1% of GDP in FY27 from 56.1% in FY2026, the banker adds.
Morgan Stanley says that a pickup in nominal growth will help lift tax buoyancy and improve tax collections in the financial year 2026-27, helping the government prioritise capex and social infrastructure spending alongside gradual consolidation.
As the government has set a target to reduce debt to 50% of GDP by the end of FY31, the gradual fiscal consolidation in FY27 aligns with the government’s goals.
GDP growth and domestic demand
Morgan Stanley estimates an average GDP growth rate of 6.5% for India in FY27. The banker expects real GDP growth at 7.6 per cent in FY26.
Morgan Stanley says that India’s domestic consumption will drive GDP growth, amid continued global uncertainty from tariffs and geopolitics weighing on external demand. The baker adds that the combined impetus from fiscal and monetary policy, improved purchasing power, and the labour market outlook is likely to ensure that the consumption recovery is sustained.
“To be sure, we remain watchful of the upcoming change in the base year for the GDP series, along with the second advance estimate for F2026, as well as 3QF26 estimates will be released at end-February”, Morgan Stanley said in the report.
Inflation projection
Morgan Stanley puts their FY27 headline CPI forecast in line with the Reserve Bank of India’s target of 4 per cent.
Morgan Stanley states that within CPI, the food prices are likely to be partially affected by a weak base, but the trend in core inflation is likely to remain manageable so that both food and core CPI converge to about 4.0 per cent to 4.2% YoY.
“In our view, a lower weight of food in headline CPI is likely to aid in curbing excess volatility in overall inflation. This should help inflation expectations stay anchored, which augurs well for consumer sentiment.” the bank added.
On the government’s capital expenditure in FY26, Morgan Stanley remains cautiously optimistic. “Pickup in domestic demand should lift capex; however, we remain watchful of impact from weaker external demand.” the banker added.